Stormy Weather for Market as Washington Bickers

The economic damage from Super Storm Sandy will show up in November's jobs report and elsewhere in the coming week, but the markets will stay fixated on Washington's "fiscal cliff" talks.

Oliver Quillia for CNBC.com

The cliff negotiations between the White House and Congressional Republicans seem to be going sideways with no progress on taxes or spending cuts, and markets have been somewhat patient so far with political posturing. (Read more: Boehner on 'Cliff' Talks: 'We're Almost Nowhere')

Stocks were higher on the week but ended mixed for the month of November, with the Dow down a half percent at 13,025; the S&P up 0.3 percent at 1416, and the Nasdaq up 1 percent at 3010, on the back of gains in some big tech names. (Read more:Stocks End Mixed as 'Cliff' Doubts Linger)

"Sandy is beginning to influence the jobs data and many other sorts of data for the next couple of months … just at a time when the market is uncertain about the fiscal cliff, and the lingering uncertainties about Europe and China and elsewhere," said Ed Keon, portfolio manager at Quantitative Management Associates. "Now we have these other uncertainties and the data is going to be less relevant than normal. We are just going to have to adjust." (Read more: Will the 'Cliff Fight Knock Out the December Rally?)

But Keon does not believe that makes for a negative market environment, and he also expects the fiscal cliff to be resolved. The cliff is the expiration of dozens of tax breaks and the onset of automatic spending cuts if Congress does not act.

"I have actually been a small net buyer over the past couple of weeks, not a huge buyer. I have been buying for some of my funds," Keon said, adding he saw some good values when the market sold off in the days after the election.

Economists expect to see the impact of Sandy in Monday's ISM manufacturing data, construction spending and car sales. Auto sales should see a positive impact, as tree damage and flooding destroyed many east coast vehicles. Other data have shown negative impacts, particularly jobless claims for the past three weeks. Chain-store sales for November were also affected, as was Friday's report of personal spending.

Auto sales could surge above a 15 million annualized selling rate in November, up from 14.3 million on improvements in housing and pent-up demand, in addition to the Sandy replacement cars.

As for Friday's jobs report, the consensus forecast among Wall Street economists is that 100,000 nonfarm payrolls were created in November and the unemployment rate stays unchanged at 7.9 percent, according to Thomson Reuters. That is down from 171,000 payrolls in October.

But some economists believe the report could be much weaker. Barclays Capital economists expect just 50,000 jobs were created in November, and the unemployment rate crept up to 8 percent.

"From our point of view, this is only a Sandy effect. This is not a fiscal cliff issue," said Barclays economist Michael Gapen. "You had a very large rise in jobless claims two weeks after Sandy hit." Gapen said that follows a pattern in claims seen after other major storms.

"In the month after landfall is where there's the most distortion," said Gapin. "Claims, payrolls, retail sales, industrial production."

Gapen said fourth-quarter GDP is now tracking at 1.8 percent, but his forecast is still for 2.5 percent. "Somewhere in here we should see the low point, and we should start to tick higher," he said of the fourth-quarter economic reports.

Gapen expects first-quarter GDP to grow by 1.5 percent, due to the impact of fiscal tightening and higher taxes. "We expect an outcome on the fiscal cliff that's not overly disruptive to either markets or the economy. We look for about $200 billion of the $650 billion in tightening to go into effect. That would take about 1 percent off of growth in the first quarter," he said.

Keon said one reason he sees stocks as a good value is that he sees the economy gaining some traction. He pointed to the improvement in housing and the fact that household balance sheets have improved.

He is also not worried about the pending impact of tax changes on stocks. When the capital gains tax and dividend taxes were first cut, he said the benefit to stocks was only about two percent. He also noted that only about half of stocks are owned by taxable investors.

Both capital gains and dividend tax rates are 15 percent, and if tax breaks are left to expire the highest capital gains tax rate would revert to 23.8 percent and the highest dividend rate could be 43.4 percent. Those would be the levels on the highest income earners, when including the new 3.8 percent Affordable Care Act tax on the top income brackets.

"With a little bit of traction in the jobs market, a little bit of traction in the economy and a little bit of improvement in consumer confidence, we have a better chance in 2013 of seeing growth a little bit better than people were expecting, rather than worse," he said.

Keon said the trend of companies paying special dividends is likely a positive though there's not enough data on the trend to do quantitative analysis. "In general, a focus on being creative in ways to reward shareholders is a good thing," he said. Companies have been rushing to offer special dividends to shareholders ahead of year end and the expected higher dividend tax rates.

"Usually what happens is you get a boost from announcing the special dividend. But once the dividend is paid out you get a subsequent drop," he said.